Question 1 Explain the Black Scholes Formula Question 2 Let S = $41, K = $40,σ = 0.3, r = 8%, T = 3 months and 8 = 0. Compute the Black Scholes call price. Question 3 Using the same inputs as in Question 2 and with a put price of $1.607, show how to compute the put price using Black Scholes then by using the Put-Call parity principles.
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- 1) Using the Black and Scholes formula, for each payoff compute the price, delta and probability of being exercised: 1a) A call, K=90, So=100, T=0.25, o=0.2 and r=0.01. 1b) A put, K=37, So=35, T=0.3, o=0.3 and r=0.02. 1c) A call, K=23, So=24, T=5 months, o=24% and r=2%. 1d) A call, K=95% of So, So=50, T=9 months, o=50% and r=3%. 1e) A put, K=97% of So, So=95, T=1 year, o=D30% and r=2%. 1f) An "at-the-money" straddle, So=95, T = 3 months, o=35% and r=2%.Consider the following payoff table: DA: Decision Alternative. Decision Alternative Good Bad Probabilities State of Nature 0.6 DA1 -3.22 DA2 13.80 DA3 3.75 DA4 4.06 6.33 What is the Expected value under perfect Information (EVUPI)? (Please keep 2 decimals for your answer) Your Answer: Answer 0.4 5.21 -5.40 6.00Assume X = $100 and So = $95. With T on the X-axis and $ on the Y-axis, plot the time value (price minus intrinsic value) implied for each of the following long call prices. Pa(So,T1,X) = $6.00; Pa(So,T2,X) = $7.00; Pa(So,T3,X) = $8.20; Pa(So,T4,X) = $12.50
- Consider a two-factor Arbitrage Pricing Theory (APT) model, T; = a; + b1,ifı + b2.i f2 + €i, with the following information Asset i Asset 1 0.07 0.50 0.25 Asset 2 0.15 1.10 0.75 Asset 3 0.20 b1,3 Hi b1i b2i 1.0 and the risk-free rate rp is 0.025. (a) Find the value of b13 to preclude arbitrage opportunity. (b) is an Asset 4 with 4 = 0.13, b14 = 0.8, and b2.4 = 0.4. Explain how you would exploit an arbitrage opportunity if thereThe delta of a call optio is very much in-the-money is likely close to a. 0 delta b. 100 deltafind the trynors ratio for q and compare it to treynor ratio for m does this analysis indicate whether q is under priced, over priced or correctly priced Beta q= 1.25, rf= 2% rm=12% rq=13.5%
- a. A butterfly spread is the purchase of one call at exercise price X1, the sale of two calls at exercise price X2, and the purchase of one call at exercise price X3. X1 is less than X2, and X2 is less than X3 by equal amounts, and all calls have the same expiration date. Graph the payoff diagram to this strategy.b. A vertical combination is the purchase of a call with exercise price X2 and a put with exercise price X1, with X2 greater than X1. Graph the payoff to this strategy.Construct the payoff piecewise function from a bull spread when puts with strike prices K1 and K2, with K2 > K1, are used.Please calculate CAPM of Asset J with the following information: where, kj = required return on asset j, Rf = risk-free rate of return, (6%) bj = beta coefficient for asset j, (1.75) %3D Rm = market return. (10%) The equation for CAPM is kj = Rf + [bj x (Rm - Rf)] kj = Solve for required return on asset j (kj is CAPM) Please be detailed when answering and show all work, thank you.
- Translate the following monetary payoffs into utilities for a decision maker whose utility function is described by an exponential function with R = 250: –$200, –$100, $0, $100, $200, $300, $400, $500.- Exercise 2 An investor who maximizes a linear mean-variance utility, U(µp, σp) μpaσ, optimally invests half of her wealth in asset 1, having expected re- turn μ₁ = 10% and standard deviation σ1 10%, and half of her wealth in a risk-free asset, having return FR = 4%. = (a) Find the efficient frontier and represent it in the plane (σp, μP) (assuming that the investor feasible portfolios can include a short position in the risk- free asset). (b) Find the risk-aversion parameter a of the investor. (c) Using the same efficient frontier, for which levels of risk-aversion parameter the investor has a negative position in the risk-free asset? =For each of the following option positions state the risk profile, draw the profit and loss area and show the breakeven price on each graph. a) Long 7.00 call @ 0.30 b) Short 7.00 call @ 0.30 Risk profile: Risk profile: c) Long 7.00 put @ 0.20 d) Short 7.00 put @ 0.20 Risk profile: Risk profile: